Author: Danielle Sobkin, Graphics: Bella Aharonian
The BRB Bottomline
The Russian economy has taken a massive hit as sanctions bite. The effects – both ongoing and soon-to-be – will create chaos within the previously strong-standing society. The country, now being cut off by neighbors and pressured into inescapable stalemates, has introduced new policies detrimental to the Russian people and business. Read on to learn more about the effects of sanctions and to review excerpts of an exclusive BRB interview with a Russian business owner.
The Russian government has taken absolute control of policy regulations and personal lives.
Inescapable Economic Regimes
The key rate of the Russian Central Bank has now been set to a whopping 20% – the highest it has been in almost two decades. Staggered on top of that are some of the most oppressive and imposed controls on the current flow of capital. The government attributed this to the increased inflationary risks and tumbling depreciation of the ruble which has lost over a third of its value in less than a week.
Western sanctions have crippled the Russian currency, and they will continue to cause a significant downturn in the already poor living standards across the country. While international retailers – such as Ikea, Zara, Apple, and others – exit the crisis-hit country, inflation and economic hardships continue to exacerbate.
The inescapability and fear of governmental retaliation have caused a deepening divergence in Russia. External sanctions have plundered the Russian economy. More than half of the Central Bank of Russia’s reserve assets are frozen and unattainable. This threatens the stability of the country, thus propelling it into an inextricably risky situation. The threat of a banking system collapse is just a push away.
Sanctions on Russia
Despite growing external pressures and demoralizing sanctions tearing at the seams of its economy, Russia has nonetheless continued its invasion into Ukraine. The list of sanctions has now more than tripled in recent days. Some prominent sanctions include asset freezes, Ruble limitations, and export bans.
Threats and Fears
Things are getting worse and spirling faster than any economist or AI model can predict. The country’s vitality is at stake, and the Russian people fear for their uncertain future. Spending bursts have been seen rampant across the country. These trends are followed congruently with rapid price rises due to export limitations and company cut-offs. Consumers fear the future unattainability of basic products.
The current climate of the country will affect all sectors of the economy. Many fear for the longevity of the Russian economic sector and the prosperity of startups and small businesses, which cannot survive aggressive and oppressive sanctions.
To understand the gravity of the status quo within Russia, we have managed to interview a business owner under the promise of anonymity to provide a first-hand account of the current climate of the country. The following is a direct pull from our conversation.
“First of all, according to new Russian law we cannot use the word ‘war,’ only ‘special operations’ instead. Also, we cannot comment or discuss it, or we could be charged with up to 15 years in jail. Some independent news media were banned by authorities because they talked about ‘special operations.’ Also, Facebook and Twitter are banned, and YouTube is expected to be next. As I said before, we cannot discuss publicly this operation:
- All peaceful demonstrations are canceled due to COVID-19
- A lot of people who take part in marches for peace are arrested
- Police can stop you in a subway and check your mobile
- Police can stop you when you’re walking with your friends in a city center
As for the business impacts, I’ve talked a lot with my colleagues – different small businesses – and all the guys are shocked, but almost everyone is trying to cheer up and continue to work and move somewhere, but nobody knows where. We’ve encountered many problems and this is just the beginning. For the first few days, we didn’t know what was happening and what to expect. Now, more than a week has passed and we can realize some crucial things:
- We don’t know when ‘special operations’ will be finished, we don’t know its goals. This is a big uncertainty for everyone.
- Our currency rate to EUR/USD has gone down almost twice. As you may know before 2014, it was 35 rubles for 1 dollar and 45 rubles for 1 euro. This year, before the ‘special operations’ began, it was a rate of 75 rubles for 1 dollar and 85 rubles for 1 euro. Today it is 116 rubles for 1 dollar and 126 rubles for 1 euro – this is the central bank’s official currency rate. The real rate in currency exchange points is about 150.
- The inner rate of our bank spreads for 30 rubles for buy/sell operations. Today I had sold USD for an inner rate of 108 rubles. If I wanted to buy USD, it’d cost me about 140 rubles. So banks try to make and profit money in this situation.
- Our bank got its sanctions list last week. It happened so urgently, so we couldn’t react and suffered a lot. We (the company) expected payment from Chinese buyers but he sent it in the morning and 2 hours later we saw the news that our bank was on the list and our money was suspended and sent back to him. We tried to open a new USD and euro account in a different bank, and the Chinese buyer tried to send the money all of last week and failed. Today I hurried to open a Chinese Yuan account. I hope it will be successful, at last.
- We lost 3 suppliers to our European distributors last week. These supplies were planned for the end of 2021 and no one expected that it could be suspended. It was incredibly ridiculous. One of them is a big chain of alco supermarkets and we negotiated with them for half a year to prepare that supply, but last week we saw in the news that they suspended all Russian products. Two hours later, we got a message that they canceled our supply. 2 other distributors said that they had no way to transfer our beer because all borders were just closed. Also, I know that other Russian craft breweries who sent beer earlier asked to return the money back.
- New laws force Russian companies to exchange for rubles 80% of their foreign currencies which they have on their Russian bank accounts
- A lot of our Russian suppliers suspended supplies. They don’t have a lot in stock and they cannot import new ingredients because of sanctions and closed borders. Soon, we won’t be able to brew IPA’s and stouts because we won’t have hops and good malt.
- Those who don’t suspend supplies will raise prices up to 2-2.5 times depending on the currency rate.
- Some companies plan to leave the Russian market or suspend supply – for example, aluminum can producers. There are only 2 big plants of aluminum cans in the Russian market and they use foreign ingredients, so they don’t know how to continue their productions. It’s a domino effect.
- Russian authorities had issued counter-sanctions. According to them, we cannot do business with a certain list of countries. We cannot keep money in foreign bank accounts, too.
- However, they (the government) do not hurry to help us – reduce taxes or give good loans. Instead, the Central bank has dramatically raised key interest rates up to 20%. That means that loans for companies will have an interest rate of 25% or more. That is incredible.
- Many craft breweries encounter bullying. We receive messages and harassment that are very offensive. We want peace and support for all those who’ve suffered and continue to suffer.”
The key takeaway from our conversation: the Russian government will not back down, placing personal agendas beyond the care of their people. New and invasive policies are cracking down to ensure that bad-press and truthful media do not spread within the country. Business owners face irreparable repercussions which are detrimental to the prosperity and survival of their companies. The bottom line is that the Russian government doesn’t care. These so-called “special operations” are a host for falsehood.
- Overall, Russia is in an incredibly volatile position.
- While the sanctions have come too late to prevent the invasion of Ukraine, they are inching closer to triggering financial mayhem and chaos.
- Businesses owners, startups, and major players within the Russian economy have felt the shockwaves that are only just beginning.
- The serious, unpredictable implications are increasing and doubling with each new sanction and policy.
- The intense economic pain has taken a toll on both the entirety of Russia’s economy and the citizens who now struggle to afford basic necessities.
- The question stands – will this country recover from its financial failures, or sink further into deterioration as a once regarded national financial superpower?